This report is based on information obtained from about 40 economists who attended a regular meeting of the Fourth District business economists round table held at the Federal Reserve Bank of Cleveland on January 29, 1971. In general, these economists have a considerably less optimistic outlook for the economy in 1971 than that contained in the recently released forecast of the Council of Economic Advisers.

The median forecast of the group was for a GNP of $1,045 billion in 1971, with a year-to-year gain of 4.2 percent in the price deflator and only 2.7 percent in real GNP. Views on the unemployment situation were generally pessimistic. With real GNP projected to rise 4.4 percent from the fourth quarter of 1970 to the fourth quarter of 1971, and with above-average gains expected in the labor force and productivity, most of the economists felt there would be little or no reduction in the unemployment rate by year end.

On the other hand, some members of the group expressed the view that the decline in consumer confidence has bottomed out, and that there was a favorable change in the climate for consumer spending toward the end of the fourth quarter of last year. New car sales are not expected to reach boom proportions in 1971, however, particularly after allowance for the recoupment of strike-induced losses during 1970. The median forecast of new car sales in 1971 (submitted by ten economists associated with the automotive, steel, and rubber industries) calls for domestic sales of 8.6 million units and imports of 1.2 million units. Auto production is expected to level off in February at roughly an 8.5 million annual rate and to continue at that rate through the second quarter. It was noted that part of the rebound in auto sales during the current quarter would be reflected in the producers' durable goods component of GNP as a result of the postponement of fleet car purchases and the shortage of GM trucks in the fourth quarter.

The three steel industry economists attending the meeting were not enthusiastic about the outlook for their industry. New orders for steel are up sharply (one major company said its orders were running 50 percent above the level of two or three months ago), but production for 1971 as a whole is expected to be virtually unchanged from last year. Price-hedging, in addition to strike-hedging, is now considered to be an important factor accentuating steel shipments during the first seven months of this year. Among the unfavorable developments reported was the expectation that the net trade deficit in steel is projected to widen from 6.6 million tons in 1970 to 13.3 million tons in 1971. The consensus of the steel industry economists was that if there is a steel strike, inventories held by steel consumers would last about two months. It would take a strike of at least three months before other industries would be seriously affected. If there is no strike, the liquidation of excess steel inventories would probably extend into the first quarter of next year.

With respect to capital goods, the business economists generally expect current dollar expenditures to remain flat during the first half of 1971 and to begin a modest recovery in the second half. One favorable straw in the wind was noted by an economist from a major machine tool company in Cleveland. He seemed to draw some encouragement from the fact that in January his company's new orders for metal cutting tools were about 25 percent above the extremely depressed rate of the fourth quarter.

Economists from several large commercial banks who attended the meeting mentioned that despite the recent sharp decline in short- term interest rates and the reductions in the prime rate, many banks had not relaxed compensating balance requirements in an attempt to increase business loan activity. According to these economists, big banks do not get "political mileage" out of reductions in compensating balance requirements.